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Carlyle Weighs Lower IPO Price

Private equity firm now targeting $22-23 a share, down from $23-$25; wants deeper discount to Blackstone.

May 2, 2012

Carlyle Group LP may cut the price of its initial share sale as it seeks to replicate the performance of companies it has taken public and emerge as the only U.S. buyout firm trading above its offering level.

The Washington-based private equity manager plans to sell shares for $22 to $23 each after seeking $23 to $25, said two people with knowledge of the matter, who declined to be identified because the talks are private.

Carlyle deepened the discount it’s offering relative to rival Blackstone Group LP even after co-founder David Rubenstein told prospective investors in New York last week the deal is designed to maximize returns for buyers. The firm has enough orders to cover the sale at $23, and may price lower to boost the chance of a first-day gain, the people said.

“It’s a little bit of a harder sell than in the past,” said Tim Loughran, a finance professor at the University of Notre Dame’s Mendoza College of Business in Notre Dame, Indiana. “If private equity had been doing so wel,l they wouldn’t have to be doing this discount to get people interested.”

At the new midpoint, Carlyle would be valued at $6.85 billion, or about 7.8 times last year’s distributable earnings of $881.6 million, adjusted for the effects of the IPO and last year’s acquisition of AlpInvest Partners NV, data compiled by Bloomberg show. That’s a 64 percent discount to Blackstone, which trades at about 22 times its 2011 distributable earnings of $696.7 million. The earnings measure largely reflects profits made from selling companies owned through buyout funds.

Rubenstein and co-founders Bill Conway and Daniel D’Aniello, who started the firm 25 years ago, aren’t selling any of their personal holdings in the IPO. Each will own about 15 percent of the firm following the offering, or about 47 million shares. Those stakes would each be worth $1.06 billion at the midpoint of the new range.

Carlyle has touted its record of taking companies public in private discussions with investors, according to a person familiar with the meetings. Seven of the 11 U.S. IPOs the firm led for portfolio companies since 2010 are trading above their initial prices.

Carlyle’s Discount

Knowing how to gauge market sentiment may help Carlyle pull off the sale, said Richard Marin, head of mortgage restructuring firm Ironwood Global LLC and the former chief executive officer of Bear Stearns Asset Management.

“They should know better than most what it takes to interest investors,” Marin said. “Whether or not they know how to follow through on it and make the stock perform is a different question.”

Carlyle-backed companies such as Dunkin’ Brands Group Inc. and Nielsen Holdings NV gained 74 percent and 27 percent, respectively, through yesterday since their IPOs and rose 38 percent and 13 in the 30 days after going public, according to data compiled by Bloomberg. The 11 companies that Carlyle has taken public in the U.S. since 2010 gained an average of 4.5 percentage points more than the Standard & Poor’s 500 Index in the first 30 days after their debuts, Bloomberg data show.

By offering a discount, the firm is looking to avoid the fate of Blackstone and Apollo Global Management LLC, whose stocks have tumbled since share sales in 2007 and 2011, and more recently, of Oaktree Capital Group LLC, which has declined about 6 percent from its debut last month after the distressed-debt investment firm slashed the size of the sale.

Investors have struggled with how to value publicly traded private equity firms partly because their earnings are hard to predict, with the bulk coming from buyout funds that sell assets at various times. Carlyle has argued that investors should judge the firm on distributable earnings.

Carlyle’s fee-related earnings, a key metric for public investors that excludes a firm’s cut of profits from buyout investments, have lagged behind those of Blackstone and KKR & Co. during the past three years. Carlyle also depends on private equity for more than half of its revenue, compared with almost 18 percent at Blackstone.

While private equity firms have worked to grow beyond leveraged buyouts, Blackstone had declined by 56 percent through yesterday since raising $4.75 billion in a 2007 IPO. The same year, Fortress Investment Group LLC and Och-Ziff Capital Management Group LLC held their own U.S. IPOs and had since lost 80 percent and 72 percent. Apollo, whose shares were previously traded on a private exchange run by Goldman Sachs Group Inc., held a $565 million U.S. share sale in March and had lost 32 percent since then.

Seeking ‘Kick’

The exception is KKR, which had gained 35 percent through yesterday since moving its listing to the U.S. from Amsterdam in July 2010. The company didn’t hold an IPO, choosing instead to combine with its publicly traded European fund.

Carlyle is making about 10 percent of itself public in the deal and plans to list on the Nasdaq Stock Market under the symbol CG. JPMorgan Chase & Co., Citigroup Inc. and Credit Suisse Group AG are leading the offering, whose proceeds will go toward paying off debt.

“They’re working really hard to reassure investors, especially by saying the founders won’t cash out right away,” Douglas Kelly, a Santa Monica, California-based analyst at IBISWorld Inc., said in a telephone interview. “The marketplace has proved pretty unreceptive to alternative-asset firms going public, so it’s in their interest to price it low on hopes that there’s some kind of kick coming out the other end.”

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